GDP (Q2) - Capital Economics
US Economics

GDP (Q2)

US Data Response
Written by Andrew Hunter
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The 32.9% annualised decline in GDP in the second quarter, more than three times larger than the previous record quarterly contraction, underscores the unprecedented hit to the economy from the pandemic. We expect it will take years for that damage to be fully reversed.

Economic damage will take years to unwind

  • The 32.9% annualised decline in GDP in the second quarter, more than three times larger than the previous record quarterly contraction, underscores the unprecedented hit to the economy from the pandemic. We expect it will take years for that damage to be fully reversed. (See Chart 1.)
  • Unusually for an economic downturn, the fall in GDP was driven by a 34.6% plunge in consumption as the lockdowns in late March and April forced consumers to stay at home. Services consumption was down by 43.5%, with the biggest declines coming in healthcare, as non-essential check-ups and procedures were delayed, recreational services, and spending at bars and restaurants. The good news is that, despite the plunge in employment, real disposable income surged by 44.9% annualised, with the personal saving rate hitting a record-high of 25.7%. That underlines the importance of the fiscal support provided by Congress, including the enhanced unemployment insurance payments which are set to expire on Friday.
  • Investment was a bit weaker than we had anticipated, with business investment falling by 27% and residential investment down by nearly 40%, although the latter is clearly now rebounding rapidly. Exports plunged by 64% annualised, with imports down by 53%, although the larger size of the latter meant net trade made a positive contribution to GDP growth. But that was more than offset by a huge 4%-pts drag from inventories. Finally, the fiscal stimulus contributed to a 2.7% rise in government spending, although that would have been bigger in the absence of a 5.6% drop back in state & local spending, which is likely to be an ongoing drag as revenue shortfalls force authorities to slash budgets.
  • The second-quarter data are to some extent old news as we already know that activity rebounded strongly in May and June, setting the stage for a strong rise in GDP in the third quarter. We’ll get a better idea when the monthly consumption data for June are released tomorrow, but we currently expect it to be more than 20% annualised. Nevertheless, with the more recent resurgence in virus cases starting to weigh on the economy in July, a continued “V-shaped” recovery is unlikely.

Chart 1: Real GDP ($bn, 2012 Prices)

Source: Refinitiv

Table 1: GDP by Expenditure (%q/q ann.)

Personal

Consumption

Expenditure

Business

Investment

Residential

Investment

Government

Expenditure

Change in

Private

Inventories ($bn)

Exports

Imports

GDP

(%q/q ann)

GDP

(%y/y)

Q3 19

2.7

1.9

4.6

2.1

44.0

0.8

0.5

2.6

2.1

Q4 19

1.6

-0.3

5.8

2.4

-1.1

3.4

-7.5

2.4

2.3

Q1 20

-6.9

-6.7

19.0

1.3

-80.9

-9.5

-15.0

-5.0

0.3

Q2 20

-34.6

-27.0

-38.7

2.7

-315.5

-64.1

-53.4

-32.9

-9.5

Source: Refinitiv


Andrew Hunter, Senior US Economist, andrew.hunter@capitaleconomics.com